Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Meridian Bio Science fiscal first quarter 2020, <unk> earnings Conference call. At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised to today's conference is being recorded.
If you require any further assistance. Please press star zero would now like the hand the conference over to your Speaker today, Brian Paul just there.
Our executive Vice President and Chief Financial Officer. Thank you. Please go ahead.
Good morning, and welcome to murder since 2021st quarter Conference call by now you should have access to a copy of the earnings press release that was published earlier. This morning, if you've not received a copy please go to the industry.
Relations section of our website to access a copy of the press release and this mornings presentation before we begin today, let me remind you that the company's remarks include forward looking statements forward looking statements are subject to numerous risks and uncertainties many of which are beyond the company's control, including risk and im.
Certainties described from time to time in the company's RCC filings. The company's results may differ materially from those projected the company undertakes no obligation to publicly update any forward looking statement.
Additionally throughout this presentation, we refer to non-GAAP financial measure specifically operating expenses.
Operating income operating margin net earnings and earnings per share each on an adjusted basis. A reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures is included in our press release, which is available on our website now let me turn this over to Jeff.
Thanks, Brian I'm gonna be starting.
On page four of the presentation to those who may have a copy of it before we jump into the financial results I'd like to highlight a few of meridians major accomplishments during the first quarter fiscal 2020, let's start with diagnostics.
In Q1, we continue to take significant steps forward any execution of our diagnostic strategy. Thanks in large part two improvements within our commercial.
Personal team's execution, we've made great progress and turning around her diagnostics business. This can be seen for the achievement of our highest level of diagnostic revenues since the first quarter fiscal 2019.
In particular customer acceptance of the revenue product line has gone very well with our installed base, reaching 114 systems customers.
Enthusiasm about this new platform because lets several to adopt additional essays when converting over to the ravaging system.
As we went into fiscal 2020, we executed a new organization and organizational change for our commercial team to drive increased focus of our sales efforts in the point of care marketplace early indicators of improved commercial ex.
Fusion in our point of care area has led to a strong Q1 for our let care to system and consumables delivering double digit growth.
We continue to refine or commercial efforts in this area and look to a strong performance overall in fiscal 2020 for our blood chemistry products now lets turn our attention to our life science business.
Revenues for life.
Its business declined in declined during the quarter, reflecting lower ordering patterns with our top IBT manufacturing customers well. These revenue levels were disappointing we continue to believe strongly in our strategy of being the partner of choice for immuno assay and molecular reagents and expect improved performance in the remaining quarters of the year, we did achieve approximately 1.8 million.
Dollars of revenue from China, representing a 70% increase over last year's first quarter, we see strong customer demand for our products in China across the life science product portfolio, including supplying molecular master mixes to help Chinese EVD manufacturing customers deliver Corona virus test now I'm going to turn it back to Brian to walk through the 2020.
One financial results.
Thank you Jack let's move right into our first quarter results on slide five as we reported earlier today consolidated revenues for the first quarter fiscal 2020 were 47.4 million as compared to 51.5 million in the first quarter fiscal 2019. This.
At present, an 8% decrease or about 7% decline excluding the impact of foreign currency exchange rate changes on a segment basis, our diagnostics business revenues were down about 5% and our life science business revenues were down about 15% for the quarter. Our diagnostics segment revenues were actually somewhat better than.
We were expecting and were particularly strong and point of care blood chemistry, which were up 16%, our gastrointestinal and respiratory categories delivered revenues for the quarter generally in line with our expectations. Our life science revenues were affected by lower ordering patterns with our top I D D manufacturing customers.
We do expect these order ordering patterns to turn around for the remainder of the year.
Gross profit margin declined over 300 basis points during the quarter with both our diagnostics in life science segments experienced a lower margins similar to our recent quarters for our diagnostic segment product pricing, particularly for April.
Salary products had an unfavorable impact on margin and for our life Science segment product mix between immuno assay reagent products and molecular reagent products as well as the lower overall levels sales at an unfavorable impact on margin.
Expectedly gross profit margin for diagnostics segment was also affected.
Got it by manufacturing ramp up activities.
Our pulled back facility, where refugee molecular diagnostic instruments and test devices are made.
On an adjusted or non-GAAP basis first quarter operating income was 7.2 million in a margin of approximately 15%.
Adjusted operating expenses.
Approximately 1 million and higher new product development spending in the diagnostic segment as long as approximately 900000 and purchase accounting amortization from the acquisition of the gene part business in the third quarter fiscal 2019.
We were able to absorb these cost increases through savings from last year's reorganization and streamlining.
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Also on an adjusted basis net earnings were 4.2 million diluted EPS was 10 cents.
On a GAAP basis operating income was 5.4 million, including a change in fair value of GE Park acquisition earn out obligation restructuring costs and lots of legal costs of approximately one point.
8 million in this quarter compared to selected legal costs of approximately 600000 in last year's quarterly results also on a GAAP basis net earnings were 2.8 million diluted EPS was seven cents.
Now, let's turn to the next slide which highlights our operating segment results for the quarter.
Starting with diagnostics as previously mentioned diagnostics revenues declined 5% 34.8 million, but we're actually somewhat better than we were expecting our acquisition of the rubber gene molecular system has helped us significantly reduce our customer account losses within our molecular product portfolio, which showed a 5%.
Recent decline after being down over 20% for the full year fiscal 2019.
Revenues for gastrointestinal product categories include the effects of contract pricing changes with our largest national reference laboratory customers for H. pylori products as well as continue competitive pressures and other products in this category.
For our respiratory product category, we experienced lighter sales volumes for influenza products for the first part of the 2019 20 respiratory season.
Revenues for our blood chemistry products grew by double digits during the quarter as we're seeing a positive effects of a new sales strategy implemented late last year.
[noise] diagnostics operating income was 5.7 million on an adjusted basis any margin of 16.5%. This level of income in margin compared to 2019 were affected by expectedly higher research and development spending of 1 million purchase accounting amortization at 900.
Thousand related to the acquisition of the gene part business in the third quarter fiscal 2019.
The effects of lower pricing for H. pylori products in our reference lab channel and volume declines in our higher margin molecular products as well as cost of manufacturing.
These inartful back facility were rather gene.
Molecular diagnostic instruments and test devices are made.
Now onto a life science life Science revenues were down 15% in the quarter 12 point sixmillion or down 14% on a constant currency basis. As previously mentioned revenue contributions from our top IBT customers reflected lower.
Patterns during the quarter.
We do expect such ordering patterns to turn around for the remainder of the year customer order activity in China was strong during the quarter and in line with our expectations revenues for our molecular reagents. During the quarter were also affected by lower pricing from the transition of our academic business too.
Independent distributors.
Life Science adjusted operating income decreased 38% in the quarter to nearly 3.2 million as result of the lower revenue level adjusted operating margins for life science in the quarter were 25% down over 900 basis points from a year ago.
Next moving to slide.
Seven we were pleased not only what the diagnostic segments revenue performance for the quarter, but also the stabilization trend going back to the second quarter fiscal 2019, we view the 33 million revenue level as a low point from once we are aiming to return the diagnostic segment to consistent and sustainable revenue growth.
Next I would like to move onto our guidance for fiscal 2020 presented on slide eight simply stated we are reaffirming our 2020 fiscal year guidance and standby or commitment of major investment in new product development for the diagnostic segment.
As a reminder, given the nature of our selected legal spending we are.
We're not providing gap base guidance for operating margin or earnings per share on a diluted basis now let me turn it back over to Jack Thanks, Brian in light of the recent news regarding Corona virus, we thought it would be great opportunity to discuss how our life science business is participating in response to this global crisis.
Let's move now to page 10.
With the recent outbreak of Corona virus, starting in January we have seen a dramatic increase in the demand for our products that support the development of diagnostic test for Corona virus meridians Liar ready our TQ PCR Master mix is a product that we introduced in fiscal 19 to our molecular customers. This master mix is designed to help companies developing Ernie.
Based molecular tests, and example, being Corona virus. This master mix when combined with specific primers in this case for Carota virus is designed to be last last last realisation of the product enables the manufacturer to deliver a high quality test in a very stable and reliable format the customer running the test and then add the.
Sample into the last last mixture in the PCR too and immediately run the test on a PCR instrument a strong performance of our master mix as well as it being laugh realization ready has led to strong demand for this product for customers looking to rapidly develop PCR test to help come back to Corona virus crisis.
Let's move on to slide number 11.
Well I already our TQ PCR Master mix is one of a large number of products that we offer within our life science product portfolio meridians brought offerings of antigens and antibodies used to develop immuno assay products along with our molecular reagents are available for all types of diagnostic testing needs, including human veterinary environmental food.
In fraud prevention diagnostics. This business has strong recurring rough.
I'm reading is well positioned in this market overall.
Now, let's turn our attention to their diagnostic business and spend a few minutes updating you on some of the business segments key initiatives and activities moving onto slide number 13.
As we have previously.
You discussed the gene POC acquisition was an important element of our diagnostic strategy that we're implementing the ability to convert our at risk Elisa installed base with the ravaging platform is a critical area of focus our commercial team has been working diligently for the six plus months since our acquisition to protect and grow our molecular business as Brian mentioned.
We saw us dramatic stabilization of our molecular business in Q1 with only a 5% reduction in the business versus the previous year. Our install base continues to grow and now stands at open at well over a 100 systems. We have strong funnels for system placements and are targeting around 20, new systems per month.
The strong customer demand has created some.
Her to increase our manufacturing capacity and the team in Quebec is making great progress increasing our capacity for both instruments and consumables a team in Quebec worked diligently over the summer and fall to increase production capacity consumable production has steadily ramped up in order to meet the demand and we continue to make positive progress on the instrument manufacturing with the.
Midterm goal of capacity to build 500 plus instruments per year.
While the majority of our placements greater than 90% have been upgrades to our lithia system, we have seen greater than anticipated willingness of customers to move additional assays onto the revenues system when converting from elite yet.
Approximately 15% of the business that we have contracts.
On ravaging is new business for Meridian. This is a combination of new customers and customers converting from a leak that have committed to adding new test onto the system. We remain excited about both the customer response to the ravaging product as was the capabilities of the team in Quebec to deliver as we ramp up the business.
Turning now to page 14.
In our strategic plan, we committed to increasing investment into our diagnostics business in conjunction with the announcement of the acquisition of the ravaging molecular diagnostic system last spring. We also eliminated our shareholder dividend. This was done to enable us to further invest in strengthening our diagnostic business, we have increased our investment across the business and side 30.
2% increase comparing Q1 2020 versus Q1 2019, we anticipate further increases in spend over the remainder of the fiscal year as we move more products into clinical trials in fiscal 20, we have multiple active development programs across all three of our platforms curian tedious that and ravaging and we anticipate.
R&D spending to be its highest 19% of diagnostics revenue.
Moving onto slide number 15.
On the previous slide I spoke to our increased investment into R&D in the near term. This slide which we have shared previously highlights the products, we have actively moving through our new product development process and working towards the.
ICL trial phase.
The clinical trial phase leads to increased investment and as a critical late step towards bringing new products to market. Our G.I. panel on the revenue platform and our C. difficile test on the Curian platform are moving into the clinical trial stays here in Q2.
All right panel clinical trial is taking place.
Over this years and next year's respiratory seasons to enable us to get the necessary specimens for our planned FDA submission. We continue to make good progress on our development efforts across all of our product areas, which will play a key role in the long term health of our business.
We anticipate excuse me, we appreciate the opportunity to share results in Q1 or 2020.
We are on track with the execution of our plans as we work to turn around this business knowing that our best days it ready and are still to come out with that said I would like to now open up the call for any questions that our listeners may have.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one.
Your telephone keypad.
Your first question comes from Bill Quirk of Piper Sandler you're likely bill.
Good morning.
Hey, good morning, everyone. Thank you. Good morning, So no number of questions here I feel permit me. So first off let let's start with that let's kind of transition year from maybe from maybe.
Bad to good I appreciate that respiratory is isn't a huge strategic focus of the company given the pipeline development, but how given that the ongoing flu season was was that negative in the quarter.
So I'll start and Brian can wrap around this bill last year. If you remember two years ago is an incredibly strong flu season right.
Once every decade type of flu season last year's flu season, we had significant ordering patterns from our from our distributors their algorithms in there in their inventory step they stocked up a bunch of inventory in Q1, and so we saw higher orders of for example, the flu products from our distributors last year in Q1.
One in virtually no sales in Q2 and beyond this year's ordering patterns from our distributors was or what I would describe as a more normal ordering pattern for us and so we did see a decline in a respiratory.
As Brian would tell you respiratory or the flu is not a huge product for us, but still we did see a decline versus the previous here, but we.
We think as the full year ends up that will end up probably being.
Likely positive throughout the year.
Ill just two more things on that point, I think you'll see more even revenue patterns quarter to quarter for us this year as it relates to our flu product because of the distribution order patterns from 2000.
The 19th.
Okay got it I appreciate that and then Brian maybe one for you.
Tax rate going forward, how should we be thinking about that.
And the the 20, 324% range you did I'm sure notice a blip during our first quarter. It was something specific to the annual equity awards that we do.
A pretty technical accounting thing I guess, I would I would characterize it as but it should normalize itself throughout the rest of the here, but is it reasonable to assume that we're going to see that every year in first quarter, though just longer term modeling purposes.
So it all depends on the grant date fair value of our equity awards versus what our stock prices when they vest.
So our answers we hope not [laughter] could go the other way.
Got it okay.
Okay understood and then maybe I'm kinda flipping over to some of the pot more positive elements in the quarter, Jack you talked a little bit about the sustainability of the blood chemistry growth that was really nice positive surprise here as we look through the overall.
Yep.
So.
I alluded to it in my comments.
We made some organizational changes as I said late summer last year.
And what I would describe as.
Some fundamental things that we that we wanted to enhance we pulled a group together in the in the.
Late summer really diving doing a deep dive as to why we weren't seeing the growth that we anticipated on the blood chemistry side.
I would describe some of the things that we're doing is fundamentals as simple as we were continuing to close a lot of new blood blood chemistry products like lot of new customers, we're still getting new systems, but we.
At a hole in the bottom of the bucket, where some customers, let's say a provider moves on and goes to another practice and they stopped using the product we had to get back to basics and really focus on ensuring that.
That we're keeping very close to our customers. So a refocus of our inside sales team to work in collaboration with our regional point of care.
Of course was probably the big change that we made.
We had a very strong Q1. There was also a later Q1 versus last year. So we don't necessarily see that same trend through through the right through the remainder of the Europe that 16% growth, but we do have good confidence that we will we will have a much stronger year in blood chemistry. This year.
We have never stop the amount of placements we continue to do in the neighborhood of 1200, new placements per year, the big differences that we aren't having some of the folks that may be stopped doing testing.
And keeping that from the growth that we could have so we've done a better job of kind of keeping the leaky leaky part of the bucket fixed if you will in that business, which will.
Qinyuan that discipline as we move forward, Okay sounds good and then maybe a.
Pivoting here to the molecular side of the business two questions.
First is the comment about targeting 20 Ravel genes.
I appreciate that you're you're placing substantially higher than that here in the first couple of quarters.
And I guess, the the relaunch as it were under under Meridian. So I guess why should this slow down or there are a number of multi system orders in here that kind of skew the numbers higher early.
Or effectively or if that's not the case I guess why should slow down to 20, and then secondly can you talk Jack a little bit bigger picture about the.
Evolving conversation that you're having with these molecular customers I mean, clearly this nice buying on ravaging relative to lithia. Thanks.
So I'll start with the 20 per month, so bill we.
We got out of the gate pretty quick we had a lot of loyal customers that that really like working with us, but that we're tired of working.
With the Alithia system quite frankly, the manual nature of that and so we had some very positive initial response and we continue to get that from our existing customers, but you have a couple of factors that come into play there are some GPO contracts that come into play that if you're not on a GPL contract. It does slow the contracting.
Thats down.
We also have we're getting into situations now where we're getting into.
More competitive environments, where we're trying to win competitive business versus just converting our existing installed base. So those are part of the reasons why we think the 20 per month range is a solid target I mean in full disclosure.
Sure. We also had to ramp up our ability to produce instruments and and so we're trying to make sure that we have the capacity to build the number of instruments that we need to do we have had a bit of a backlog where customers have got orders in that we have to work our way through with our customers. So it's really the combination of those two things that we work towards we do believe we can get into.
To that environment of 500, plus systems per per per year capability instrument wise, but we are still ramping up our manufacturing side on the instruments side to get there. So no negative views, it's been very positive from our customers, but it gets a highly competitive environment. Our sales team has had very good initial response and it's a little.
Gpos and some of the contracting does take a little longer some of the facilities. We got a lot of closes in some of our large physician offices and some of our customers are less complex from a contracting standpoint, now we're getting into places where the contracts can take several months to worked our way through the systems. In these health system. So we're still very positive on it but we think that.
It's probably more likely in that range.
On an ongoing basis, and we look forward to trying to try to accelerate it but that's what we think we have confidence and going forward at this time.
As far as the evolving conversation.
We still have a relatively limited we have a limited menu on this platform and so our discussions with customers now.
Now the plus in molecular is that no company has that a breadth of menu. So customers are used to having multiple platforms to meet their testing needs. So we're spending a fair amount of our time really on some of those core assays. The group a strep group B Strep and C. diff.
And a little bit in regards to.
Where we're going in the future with regards to the panel testing that we do customers are very excited about the multiplex panels and clearly getting our G.I. panel submitted to the FDA, which we're working hard to do later this year that will be a big opportunity, where we can start playing more offense. So we really see stabilize our installed base.
Pace over the over the coming next nine to 12 months and we think that the ability to play off its really begins about a year from now on our molecular business. When we hope to start seeing some of the new products starting to come to market. So hopefully that helps bill.
[laughter] that's great guys. Appreciate the color. Thank you. Thank you.
Again, if he would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Andrew Brockman from William Blair. Your line is open. Please go ahead andr.
Okay, and Jackie Brian Thanks for taking questions. Just just wanted to start on the life science business and order pattern.
Delays that you called out there anything else that you can add on that why do you think it's more timing than anything broader related to end market slowdown competition or shifts in chair and then I guess related to that what gives you the confidence that's gonna come back this year.
So if we if we look at our largest customers Andrew they they have patterns where they.
You know they'll have two or three big cores they'll have a lighter quarter. It just depends if in their production they order to batches of a certain test or not during that quarter or if they don't order any in that quarter. We had an unusual situation were two or three of our large ones all fell into a lighter quarter pattern. So virtually the negative amount that we had in our business.
You versus last year is entirely based on two or three customers.
That essentially were off in a quarter, we have seen quarters like that we havent necessarily seen two or three of them habit at the same time. So we certainly we're not excited that that occurred but as we delve into the business a very comfortable that we.
Havent lost the assays at those customers they still continue to run with us and in discussions with those customers. The volumes for those customers are not declining the market does have a little bit a tailwind to it. So the diagnostic companies that are building task or not making less down the road. They ultimately over time do grow a little bit. So we do have confidence of a.
Normalization hard to predict when these orders will occur at these large places the hard part for US is you know some of our biggest orders at the biggest customers can be seven $800000, even approaching $1 million. So that can make a big swing in a quarter to the positive or the negative but in this case. It was two or three that all hit with that later.
Quarter at the same time.
Okay. Thanks, that's helpful. And then just picking out of life science business here for a minute appreciate the commentary on the Corona buyers. Now you guys are playing in that anything else that you can provide just sort of from a financial standpoint, what the impact might be from from what you're seeing right now.
So.
There were.
We're not entirely clear on the full financial implications of what the current a virus is going to mean, we have had a number of customers double digit number of customers that are developing test in China and so that is a good sign but we don't know how that testing is going to go I'm from from our perspective, we.
We do not see it at changing our guidance, we are still holding our guidance range. So I think the message here is it's going to be positive for us, but it's not going to be a life changing type of positive situation.
We do see some lift I think the more exciting thing in my mind is.
That this is a key component that's used in development of all molecular test.
And these customers that we can go with and help them with Corona virus make other molecular tests. So is that create an opportunity for us to sell this product into other molecular test that they have down the road and so that's really what our sales team will be working towards a hey, we've helped me on this opportunity with Corona virus to quickly respond hopefully, they're happy with the performance, which we anticipate.
It will be can we use that as an opportunity to open the door for future business in China and in other places with regards to molecular testing.
Got it thanks, and then just on a on the diagnostic side of the business a lot of my questions on the ravaging lunch sort of been answered, but I just think about curian and.
The Pds that systems coming online later later this year can you help us maybe frame a little bit of the market opportunity here, what what's your sort of initial expectations for those products as we exit 20 and go into 2021. Thanks.
So I think that the Curian impact fiscal 20 is.
Going to be significant the fiscal 20, the first product that we intend to bring to market is securing itself and the h. pylori still antigen test on there I would describe that is more of a defensive move of an improvement to the test and improvement for our customers, but it won't necessarily pick us up a significant amount of new business movie when some new.
Sure, but we don't necessarily see that is a significant positive growth opportunity for us, but the important part of getting Curian out there is as we get into fiscal 21.
We will start bringing some new products to market I would describe the tests were bringing onto the system procurian as about 50% of them or.
70% of them are protection types of moves and the other products in particular.
A c. difficile is one that we believe that we can play offense with and we believe that that and 21 will start to provide a.
Multimillion dollar opportunity over time, we think that's a good size market that we think that we can participate more effectively and.
So that's how I would describe curian, it's an element to protection, we have a large piece of our business that is in the rapid immuno assay testing area and it was important for us to invest for our customers to improve long term, what we can offer there and so there's a bit of stabilization and then some level of offense with C. difficile being the first test for significant office.
When we get to the PD a stat. The Pds that is really not the 20 opportunity as well it's more of a 21 and beyond type of opportunity. We have a very large installed base with our lead testing, which a fair amount of that we would anticipate would convert over time to PDL stats, but the beauty of tedious that would be that those other.
Missions offices are running other test test like some adequate.
As an example.
Billy Rubin total cholesterol those types of tests are also tested a pediatrician would like to be able to run and to standardize that under one platform. We think is an opportunity. So we really see pds that as a 21 in 22 and beyond.
So.
And with what we've said before Andrew 20 fiscal 2020 is year of stabilization for us and fiscal 21 is when we think we can really start playing more offense and that offense comes from our panels coming on the molecular from C. difficile coming on Curian and then ultimately we the investment in R&D will start.
Due to develop and bringing products to market. So 2020, 121, and 22 and beyond we start to look like a different diagnostics company. So this is not a quick fix I think that's consistent with all of our discussions that we've had before but we're on track with that we're making the investments that we need to make and we feel that we're in a good position to move forward as we head into fiscal.
The remainder of $2000 into 21.
Great. Thanks, guys.
To enter appreciate it.
There are no further questions at this time I turn the call back over to John Canny for closing remarks.
Well the once again, we appreciate you for taking the time too.
Im listen to our performance in Q1.
Can we appreciate our shareholders and we firmly believe that we are on a path moving this company in the positive direction. We hope that you can see that as well and we look forward to talking you in the near future have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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